In a new recently published report, James Rydge and the Bennett Institute's Wealth Economy Special Advisor, Dimitri Zenghelis provide an in-depth economic analysis of the current economic crisis facing the UK and the investment and policy decisions the Government needs to take if it is to deliver a strong and resilient recovery after COVID-19. They summarise their main arguments:
A clear macroeconomic vision for the UK in response to COVID-19
We are in unchartered territory and a fast bounce-back from the pandemic is far from certain. There are encouraging signs of a partial rebound in UK consumer spending as lockdown eases. Some businesses have done well in the crisis, especially technology firms. But a number of challenging legacies are emerging from COVID-19, including high unemployment in certain sectors and groups, high private and public sector debt, persistent and severe supply and demand disruptions in some industries and weak private sector investment. There is also a high risk for the UK of a second wave of COVID-19, as many other countries are experiencing, which could exacerbate these legacies. It could take several years to recover from this crisis, with long-lasting and potentially permanent behavioural and structural effects.
A clear macroeconomic vision is required to restore confidence, create enduring, high quality jobs and grow the UK economy out of post-COVID recession and debt. This can be done by supporting activity in the short term and expanding productive capacity in the medium term. The Chancellor’s Summer Economic Update was a first step, aimed at supporting hard-hit sectors and preventing job losses in the short term, but the job is far from done. Now the Government’s attention needs to turn to the structural investments and policies we need to create a resilient and enduring recovery on a path of strong, sustainable, resilient and inclusive growth.
No going back to the ‘old normal’
The pace of change in the structure of the global economy is likely to intensify after COVID-19. The global climate crisis has not gone away and requires urgent action. The importance of protecting nature has become much clearer in the COVID-19 context; failure to protect nature has increased the risks of infectious disease emergence and led to immense social and economic damage. Meanwhile, the global technology revolution towards resource-efficient, low-carbon production remains unstoppable, with COVID-19 accelerating change, especially in digitisation and automation. On top of all this the Government needs to simultaneously manage the UK’s departure from the European Union.
A clear implication is that the economy is unlikely to ‘bounce back to normal’. Indeed, it would be a profound mistake for the Government to try to return the economy to the old model that was failing to deliver, including many of the Government’s stated long-term objectives of increased productivity, levelling up across the regions, improved infrastructure and net-zero greenhouse gas emissions. Attempts in the Autumn Budget to return to the failed policy of cutting spending, which followed the global financial crisis of 2008–09, would be the worst path of all. That would make achieving the Government’s economic, social and environmental objectives much more challenging in the years and decades ahead and harm the UK’s international reputation at a time when it is trying to forge a new role in the world. There can be no going back to the old normal.
The structural investments we need
A recovery package based on sustainable investment and resource efficiency can generate a sustained economic recovery, with strong job creation and, ultimately, higher tax receipts that can deliver public sector debt sustainability. Properly managed and implemented, it can simultaneously reduce existing welfare inequalities, which continue to be exacerbated by the pandemic, and improve economic and social resilience to future shocks. It can also act to decouple economic growth from materials use and greenhouse gas emissions.
The right choices now could boost productive efficiency and long-term competitiveness of the economy. This will provide better jobs – future-proofed because they are more resilient, productive and sustainable – across the country.
Sustainable investments do well on key criteria for stimulus investments; they can be implemented quickly, are labour-intensive and have high multipliers. There are many examples of green investments that can start quickly across a range of capital. The package can target investment in productive, sustainable and resilient physical, human, social, intangible and natural capital in regions that need it most.
The credible and supportive policy framework we need
Central to supporting these investments and the recovery, including meeting the Government’s long-term objectives, will be guiding expectations through credible policy while securing institutional flexibility to respond to rapid and accelerating technological and structural change. We go into detail in the report about the specific institutions and policy priorities needed to bring about a clean, resilient and inclusive recovery and meet longer term economic, social and environmental objectives. Suffice to say, the policy mix must be broad, comprehensive and coherent if it is to guide investment and rapidly scale up financial flows. Most importantly, it must be clear, credible and enduring.
Measures should cover direct investment, but also pricing and regulation, industrial policy, innovation, labour markets, skills and education, competition policy and foreign policy, as well as the creation of a new National Investment Bank. This is the most effective way to generate investor confidence and to accelerate green innovation. By contrast, mixed and muddled signals delay action, and raise the policy risk premium attached to green investments.
The private sector will drive most of the investment that is needed to rebuild to last after COVID-19, but it is seeking clarity and certainty from government, particularly around policies and institutions, to align expectations, restore confidence and start investing again. Failure to mobilise the private sector will increase costs to the Government and to consumers.
A unique opportunity
Policymakers and private sector expectations are aligning around the view that investments and policies directed at addressing the UK’s persistent economic, societal and environmental challenges may be precisely the post-COVID-19 medicine the economy needs. There is a unique opportunity to rebuild to last after COVID-19 through a strong and credible vision and strategy for recovery and transformation to a resilient, inclusive and sustainable economy.
‘Rebuilding to last: How to design an inclusive, resilient and sustainable growth strategy after COVID-19’ by James Rydge and Dimitri Zenghelis has been published by the Aldersgate Group.
This blog was first published by the LSE (commentary) on 15 July 2020